The municipal market was slightly weaker Wednesday in light to moderate secondary trading as it lagged a rise in Treasury yields triggered by stronger-than-expected job creation in the ADP National Employment Report.
The ADP data is considered an early indicator for the Labor Department’s monthly employment situation report for December, which comes out Friday and is the subject of market scrutiny and speculation.
“It feels a bit weaker today, coming off that ADP report,” a trader in Los Angeles said. “Now there’s a thought that payrolls on Friday will be stronger than anticipated. Treasuries had a much bigger reaction to it than we did, though we’re probably down two or three basis points as a result.”
In the daily Municipal Market Data commentary, Randy Smolik wrote that the muni market was poised to improve Wednesday “given the lack of secondary blocks and little building in the forward primary calendar” until the ADP data indicated that the amount of new private-sector jobs nearly tripled economists’ expectations.
ADP reported a gain of 297,000 jobs. Economists expected only 100,000 more jobs, according to Smolik, who described the jump as surprising.
The ADP data “raised concerns that December payrolls on Friday will be very strong,” Smolik wrote. “Treasuries reversed their course, trading down significantly, but muni sellers seemed reluctant to react to this one-day event.”
He said municipal market customers lingering in the five- to 10-year range bought bonds at nearby market levels, discouraging dealers from chasing street bids.
The ADP data already has prompted many economists to raise their job-creation forecasts. Janney Capital Markets sent out a note to investors increasing its job creation projection for the December employment situation report to 225,000 jobs, up 96,000 from their previous estimate.
The MMD triple-A 10-year scale rose one basis point Wednesday to 3.19%, the 20-year scale was up three basis points to 4.50%, and the scale for 30-year debt climbed three basis points to 4.71%.
“There’s some trading going on, though it’s still somewhat quiet,” a trader in New York said. “We’re largely flat, but we might be down a basis point or two out long.”
Wednesday’s triple-A muni scale in 10 years was at 94.9% of comparable Treasuries and 30-year munis were at 105.4%, according to MMD.
Meanwhile, 30-year tax-exempt triple-A general obligation bonds were at 112.2% of the comparable London Interbank Offered Rate.
The Treasury market showed losses Wednesday.
The benchmark 10-year note was quoted near the end of the session at 3.48% after opening at 3.33%.
The 30-year bond was quoted near the end of the session at 4.54% after opening at 4.41%.
The two-year note was quoted near the end of the session at 0.72% after opening at 0.62%.
Activity in the new-issue market was light Wednesday as municipal governments continued their hiatus from borrowing money.
State and local governments are scheduled to sell just $723.6 million of bonds this week, according to The Bond Buyer and Ipreo data — an uncommonly small amount of debt. Typical weekly issuance is about $8 billion.
Municipal market participants were looking forward to the lull in supply during the burst of bond sales that characterized much of the fourth quarter.
A $131.2 billion flurry of debt issuance in the fourth quarter helped propel the municipal bond market to a record $431 billion of issuance in 2010.
The barrage of new bonds undermined a municipal rally that narrowed yields to all-time lows late in the summer.
As the muni market was suffocated with week after week of $10 billion-plus of new issuance in the fourth quarter, trading desks began warily watching rising Treasury yields and became cautious of taking on bonds.
The market had trouble finding buyers for all the new debt without offering higher rates.
Now that the excess supply has all but vanished, the market isn’t exactly falling over itself to buy bonds.
This may simply be because buyers are on vacation, but it likely reflects selling from mutual funds, at least in some part.
Municipal bond mutual funds became a more prominent buyer in the past two years as they were awash in $69 billion of new money from investors in 2009 and experienced an additional $32.2 billion of inflows the first 10 months of last year.
Craig Brandon, a portfolio manager at Eaton Vance, said outflows from mutual funds are probably a factor preventing the muni market from rallying more than it has during a time of light supply.
Municipal bond mutual funds have reported $16.6 billion in outflows during the past seven weeks, according to Lipper FMI.
“Our market is very retail-driven,” Brandon said. “When retail sells bonds or sells funds that creates a demand for people to sell bonds and raise cash.”
In other economic data, the U.S. services sector expanded more rapidly than economists expected in December as new orders picked up, the Institute for Supply Management reported Wednesday.
ISM’s non-manufacturing business activity composite index rose to 57.1 on a seasonally adjusted basis, from 55.0 in November.
Economists polled by Thomson Reuters had expected a 55.5 level.
Readings below 50 signal a slowing economy. Higher ones signal expansion.
The prices paid component index, closely watched for signs of inflation, jumped to 70.0 from 63.2; employment fell to 50.5 from 52.7; production rose to 63.5 from 57.0; and new orders climbed to 63.0 from 57.7.
